Blog
Unit 3 Micro: Price Leadership in the Gas Oligopoly
19th October 2013
The market for retail gas supplies is mired in controversy and threats of direct government intervention to freeze prices should a new Labour government be elected in 2015. This week we have seen a classic example of the type of price leadership we expect to see in an oligopoly.
Hot on the heels of a steep rise in prices from SSE a few days earlier (SSE announced an 8.2% increase in domestic bills from 15 November) British Gas has announced that their own energy prices will jump by an average of 9.2% from November 2013. The average annual dual-fuel bill with British Gas will increase by £107 to £1,297.
Centrica argued that the climbing price is mainly due to higher costs for wholesale energy and delivering gas and electricity to homes, and the impact of the Coalition government's "social and (green) environmental programmes" which are paid for through customers' bills.
But now that two of the leading six suppliers have taken the decision to lift energy bills for household, commercial and industrial users, it can only be a matter of time before EDF, E.ON, npower and Scottish Power follow suit - this is a process known as price leadership and will be well understood by students of the oligopoly market structure.
One of the consequences of the frequent gas and electricity price hikes has been a substantial fiscal dividend for the UK treasury as this news article in the Telegraph makes clear.
Background:
Energy bills - where does my money go? (BBC)
Video news background
Channel 4 news
2011 Newsnight report
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.